Gartner: Consulting Woes Turn into Fuel for Growth

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Gartner, the IT research and consulting firm, is a unique way to play the growth of data. Unlike your conventional networking (CSCO, IBM) or big data (EMC) company, Gartner's growth doesn't depend on enterprise customers actually following through on a project - i.e. make a big IT investment. If IT spending stays weak, will IT professionals will simply sit on their laurels, awaiting the day management bestows upon them a fat budget? It’s unlikely. IT executives, especially, refuse to be idle – they have big salaries to justify! In the absence of plentiful funds, they do research, attend industry events to get ideas, plan and test potential investments. Gartner’s research offerings and world-class events fit this need to a tee.

The market seems to agree, affording Gartner a relatively high P/E multiple of around 29x. The upside potential from an investment in Gartner, I believe, comes from the market’s misjudgment of Gartner’s consulting business.

It’s easy to see how this weak enterprise spending environment would translate into a larger share of relatively low-cost investment in research and attending industry events as a means of preparing for tomorrow. Yet, spending-constrained IT professionals can’t spend all their time looking to the more plentiful future - they also must tend to today. Without the budget to make a big IT investment, enterprises focus on optimizing what they've already got. How do companies boost their return on existing IT systems? Well, first, they usually hire an expert to tell them where sources of improvement may lie. Enter the consultants.

Yet, this is not enough to guarantee Gartner will benefit. Indeed, this space is highly competitive. Behemoth management consultants like Accenture and Booz-Allen Hamilton are able to offer IT advice with the advantage of a deep and wide repertoire of existing relationships with management consulting clients. Smaller IT research firms, like Forrester, also offer limited advisory services, further fragmenting the industry.

What sets Gartner apart is its unique business model. It is a mistake to view Gartner’s consulting business as separate from the research and events segments. These segments fuel Gartner’s consulting business in two ways. First, they help attract new clients. Gartner events are like a new-client-prospecting machine: picture a captive audience of CIOs, eager to generate ideas and find solutions, and Gartner with full discretion over who and what they discover. Second, the research business lends Gartner brand recognition and credibility. End users of Gartner’s research are familiar with the quality insights Gartner is capable of providing. Executives also know that competitors who go to Gartner for IT consulting services are getting access to this deep wealth of insights – and we know nothing fuels business decisions like concern that the other guy is learning how to eat your lunch.

So, why would the market undervalue Gartner’s consulting business? The segment has seen some weakness as of late, due entirely to a decline in revenue from Contract Optimization business. Gartner’s management acknowledges that the decline is likely to continue. But Contract Optimization is a small and shrinking portion of the consulting business (about 10% this year). With the rest of the consulting segment growing at 6% in 2012, the company is approaching a critical cross-over point where the contract optimization decline will soon be eclipsed by growth in the remaining consulting revenue streams. When this happens, the market will see Gartner’s consulting business in a whole new light. The segment that once tainted an otherwise high-growth company will be recognized as the incremental source of growth that it truly is. I expect shares of Gartner to rise in tandem.